Everything you need to know about what to do when you inherit money uk in the UK.
Inheritance planning is the process of structuring your estate so that as much of your wealth as possible passes to your chosen beneficiaries, while minimising the amount lost to inheritance tax (IHT). In the UK, IHT is charged at 40% on the value of your estate above the nil-rate band, making it one of the most significant taxes your family could face. Effective inheritance planning can save your beneficiaries tens or even hundreds of thousands of pounds.
Inheritance planning is not just for the very wealthy. With the average UK house price exceeding £280,000 and the IHT threshold frozen at £325,000, more families than ever are being drawn into the IHT net. Even a modest family home combined with pensions, savings and life insurance can push an estate over the threshold.
The nil-rate band (NRB) is the amount of your estate that is exempt from IHT. It is currently £325,000 per person and has been frozen at this level since 2009, with no increase planned before at least 2028. Anything above the NRB is taxed at 40% (or 36% if you leave at least 10% of your net estate to charity).
The residence nil-rate band (RNRB) provides an additional £175,000 per person when you leave your main home to direct descendants. Combined with the NRB, this gives an individual a potential IHT threshold of £500,000. However, the RNRB tapers away for estates worth over £2 million.
Married couples and civil partners can transfer any unused NRB and RNRB to the surviving spouse. This means a couple can potentially pass on up to £1 million free of IHT. Transfers between spouses during lifetime or on death are completely exempt from IHT.
One of the most effective ways to reduce your estate for IHT purposes is to give money or assets away during your lifetime. Outright gifts to individuals are potentially exempt transfers (PETs)—if you survive for seven years after making the gift, it falls outside your estate entirely.
If you die within seven years, the gift is added back to your estate for IHT purposes, but taper relief reduces the tax rate on gifts made more than three years before death. In addition, you can make use of several annual exemptions each year without any seven-year requirement:
💡 The exemption for regular gifts from surplus income is one of the most powerful IHT planning tools available, yet it is widely underused. If your income exceeds your expenditure, you can gift the surplus regularly—for example, by paying into a grandchild’s savings account or covering a family member’s insurance premiums—and these gifts are immediately outside your estate.
Trusts allow you to set aside assets for the benefit of others while retaining some control over how they are used. For IHT purposes, assets placed into certain types of trust are treated as chargeable lifetime transfers. If the value exceeds your available NRB, there is an immediate IHT charge of 20%, plus periodic charges every ten years and exit charges when capital is distributed.
Despite these charges, trusts can be highly effective planning tools. Discounted gift trusts allow you to make a gift while retaining a right to fixed withdrawals, with the discounted portion falling outside your estate immediately. Loan trusts allow you to lend money to a trust while the growth on the invested funds falls outside your estate.
Bare trusts for grandchildren are simple and tax-efficient: the gift is a PET and falls outside your estate after seven years. The child has an absolute right to the funds at age 18.
Defined-contribution pension funds are generally outside your estate for IHT purposes. This makes pensions one of the most tax-efficient vehicles for passing wealth to the next generation. If you can afford to leave your pension untouched and draw income from other sources in retirement, the pension fund can pass to your beneficiaries.
If you die before age 75, the pension fund can be drawn by your beneficiaries completely tax-free. If you die after 75, withdrawals are taxed at the beneficiary’s marginal income tax rate. In either case, there is no IHT to pay. Note that from April 2027, the government has announced that unused pension funds will be brought within the scope of IHT, so this area may change.
⚠️ IHT rules are complex and change frequently. The government has signalled significant reforms, and rules around pensions, trusts and business relief may evolve. Any inheritance plan should be reviewed regularly and adapted as legislation changes. Always seek up-to-date professional advice.
A whole-of-life insurance policy written in trust can provide a fund specifically to pay the IHT bill, ensuring your beneficiaries receive the full value of the estate without having to sell assets (such as the family home) to cover the tax. Because the policy is in trust, the payout is not part of your estate and is not itself subject to IHT.
For a couple, a joint life second death policy is often the most efficient option, as IHT is typically not payable until the second spouse dies. Premiums for these policies are lower than two single policies because they only pay out once.
Business Property Relief (BPR) provides 100% IHT relief on qualifying business assets, including shares in unquoted trading companies, a business or interest in a business, and shares listed on AIM (the Alternative Investment Market). To qualify, the assets must have been held for at least two years.
Agricultural Property Relief (APR) similarly provides 100% relief on the agricultural value of qualifying farmland and farm buildings. These reliefs can be extremely valuable for business owners and farming families, but the qualifying conditions are strict and must be carefully managed.
Effective inheritance planning requires a coordinated approach involving your will, trusts, insurance, pensions, gifts and investments. A financial adviser specialising in estate and IHT planning can help you develop a comprehensive strategy that protects your family’s wealth. Find a financial adviser through Nesto to start planning your legacy.
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